COOLSAVINGS INC - 10-Q Quarterly Report

Back to GetFilings.com

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2003

OR

[___] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____ to _____

Commission file number 000-30199

CoolSavings, Inc.
------------------------------------------------------
(Exact name of registrant as specified in its charter)

Delaware 36-4462895
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

360 N. Michigan Avenue 19th Floor
Chicago, Illinois 60601
----------------------------------------------------------
Address of principal executive offices, including zip code

Registrant's telephone number, including area code: (312) 224-5000

_________________________________________

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [ X ] No [ ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ ] No [ X ]

Number of shares of common stock, $0.001 par value per share, outstanding
as of April 30, 2003: 39,101,636

INDEX

PART I FINANCIAL INFORMATION

Item 1. Financial Statements

Balance Sheets
March 31, 2003 (Unaudited) and
December 31, 2002. . . . . . . . . . . . . . . . 3

Statements of Operations (Unaudited)
Three Months Ended March 31, 2003 and 2002 . . . 6

Statement of Changes in Convertible Redeemable
Preferred Stock and Stockholders' Deficit
(Unaudited) Three Months Ended March 31, 2003. . 7

Statements of Cash Flows (Unaudited)
Three Months Ended March 31, 2003 and 2002 . . . 8

Notes to Financial Statements (Unaudited). . . . . 9

Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. . . 18

Item 3. Quantitative and Qualitative Disclosures
About Market Risk. . . . . . . . . . . . . . . . . 38

Item 4. Controls and Procedures. . . . . . . . . . . . . . 38

PART II OTHER INFORMATION

Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . 39

Item 2. Changes in Securities and Use of Proceeds. . . . . 39

Item 3. Defaults Upon Senior Securities. . . . . . . . . . 39

Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . 40

SIGNATURES AND CERTIFICATIONS . . . . . . . . . . . . . . . . 41

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

COOLSAVINGS, INC.
BALANCE SHEETS
(in thousands, except share and per share data)

MARCH 31,
2003 DECEMBER 31,
(UNAUDITED) 2002
------------- -----------

ASSETS
------

Current assets:
Cash and cash equivalents . . . . . . . $ 4,914 $ 4,867
Restricted certificates of deposit. . . -- 231
Accounts receivable, net of allowance
of $743 and $753 at March 31, 2003
and December 31, 2002, respectively . 4,745 4,900
Prepaid assets. . . . . . . . . . . . . 278 244
Other assets, including amounts due
from related parties of $3 and $13
at March 31, 2003 and December 31,
2002, respectively. . . . . . . . . . 124 360
---------- ----------
Total current assets. . . . . . . 10,061 10,602
---------- ----------

Property and equipment. . . . . . . . . . 8,909 9,051
Capitalized software costs. . . . . . . . 1,490 1,490
Capitalized web site costs. . . . . . . . 3,257 3,152
---------- ----------

13,656 13,693

Less accumulated depreciation and
amortization. . . . . . . . . . . . . . (10,938) (10,391)
---------- ----------
2,718 3,302

Intangible assets, net of accumulated
amortization of $460 and $399 at
March 31, 2003 and December 31,
2002, respectively. . . . . . . . . . . 40 101
---------- ----------

Total assets. . . . . . . . . . . . . . . $ 12,819 $ 14,005
========== ==========

COOLSAVINGS, INC.
BALANCE SHEETS - Continued
(in thousands, except share and per share data)

MARCH 31,
2003 DECEMBER 31,
(UNAUDITED) 2002
------------- -----------

LIABILITIES
-----------

Current liabilities:
Accounts payable, including amounts
due to related parties of $14 and
$55 at March 31, 2003 and December 31,
2002, respectively. . . . . . . . . . $ 567 $ 1,091
Accrued marketing expense, including
amount due to related parties of $115
and $77 at March 31, 2003 and
December 31, 2002, respectively . . . 1,410 989
Accrued compensation. . . . . . . . . . 895 1,147
Accrued interest, including amounts
due to related parties of $75 and
$76 at March 31, 2003 and December 31,
2002, respectively. . . . . . . . . . 75 76
Accrued expenses, including amounts
due to related parties of $781 and
$782 at March 31, 2003 and December 31,
2002, respectively. . . . . . . . . . 2,367 2,179
Lease exit cost liability . . . . . . . 455 311
Deferred revenue. . . . . . . . . . . . 571 516
Senior secured note payable due to
related party . . . . . . . . . . . . 5,706 5,592
---------- ----------
Total current liabilities . . . . 12,046 11,901
---------- ----------

Long-term liabilities:
Deferred revenue. . . . . . . . . . . . 111 177
Lease exit cost liability . . . . . . . 972 1,014
Accrued expenses due to related parties 3 91
---------- ----------
Total long-term liabilities . . . 1,086 1,282
---------- ----------

Commitments and contingencies (Note 9)

Convertible redeemable cumulative Series B
Preferred Stock, $0.001 par value,
258,000,000 shares authorized at
March 31, 2003 and December 31, 2002,
and 150,422,668 and 148,600,102 issued
and outstanding at March 31, 2003
and December 31, 2002, respectively
(liquidation preference of $0.1554 per
share at March 31, 2003 and December 31,
2002). . . . . . . . . . . . . . . . . . 23,374 23,091
Convertible redeemable Series C Preferred
Stock, $0.001 par value, 13,000,000
shares authorized and 13,000,000 shares
issued and outstanding at March 31, 2003
and December 31, 2002 (liquidation
preference of $0.1665 per share at
March 31, 2003 and December 31, 2002). . 1,950 1,950

COOLSAVINGS, INC.
BALANCE SHEETS - Continued
(in thousands, except share and per share data)

MARCH 31,
2003 DECEMBER 31,
(UNAUDITED) 2002
------------- -----------

STOCKHOLDERS' DEFICIT
---------------------

Common stock, $0.001 par value per
share, 379,000,000 shares authorized,
39,093,660 shares issued and out-
standing at March 31, 2003 and
December 31, 2002 . . . . . . . . . . . 39 39
Additional paid-in capital . . . . . . . 73,140 73,608
Accumulated deficit. . . . . . . . . . . (98,816) (97,866)
---------- ----------

Total stockholders' deficit . . . . . . . (25,637) (24,219)
---------- ----------

Total liabilities, convertible
redeemable preferred stock and
stockholders' deficit . . . . . . . . . $ 12,819 $ 14,005
========== ==========

The accompanying notes are an integral part of the financial statements.

COOLSAVINGS, INC.
STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)

FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(UNAUDITED)

2003 2002
---------- ----------
Revenue:
e-marketing services. . . . . . . . $ 7,549 $ 5,697
License royalties . . . . . . . . . 75 66
---------- ----------
Net revenues. . . . . . . . . . . . . 7,624 5,763

Cost of revenues. . . . . . . . . . . 788 984
---------- ----------
Gross profit. . . . . . . . . . . . . 6,836 4,779
---------- ----------
Operating expenses:
Sales and marketing . . . . . . . . 4,395 3,495
Product development . . . . . . . . 754 1,072
General and administrative. . . . . 2,227 2,486
Lease exit costs. . . . . . . . . . 209 --
Loss on asset impairment. . . . . . 81 --
---------- ----------
Total operating expenses. . . . . . . 7,666 7,053
---------- ----------

Loss from operations. . . . . . . . . (830) (2,274)

Other income (expense):
Interest and other income . . . . . 19 14
Interest expense. . . . . . . . . . (139) (285)
---------- ----------
Total other income (expense). . . . . (120) (271)
---------- ----------
Loss before income taxes. . . . . . . (950) (2,545)
Income taxes. . . . . . . . . . . . . -- --
---------- ----------
Net loss. . . . . . . . . . . . . . . (950) (2,545)

Cumulative dividend on
Series B Preferred Stock. . . . . . (468) (204)
---------- ----------
Loss applicable to common
stockholders. . . . . . . . . . . . $ (1,418) $ (2,749)
========== ==========

Basic and diluted net loss
per share . . . . . . . . . . . . . $ (0.04) $ (0.07)
========== ==========

Weighted average shares used in
the calculation of basic and
diluted net loss per share. . . . . 39,093,660 39,093,660
========== ==========

The accompanying notes are an integral part of the financial statements.

COOLSAVINGS, INC.
STATEMENT OF CHANGES IN CONVERTIBLE REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' DEFICIT

FOR THE THREE MONTHS ENDED MARCH 31, 2003
(UNAUDITED)
(in thousands, except share and per share data)

COOLSAVINGS, INC.
STATEMENTS OF CASH FLOWS
(in thousands)

FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(UNAUDITED)

2003 2002
---------- ----------
Cash flows provided by (used in)
operating activities:
Net loss. . . . . . . . . . . . . . . $ (950) $ (2,545)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization . . . . 670 1,210
Provision for doubtful accounts . . . 281 169
Interest payment in kind. . . . . . . 113 105
Write-off related to website
project costs . . . . . . . . . . . -- 86
Landmark transaction costs. . . . . . -- 21
Loss on asset impairment. . . . . . . 81 --
Changes in assets and liabilities:
Decrease in restricted certificates
of deposit. . . . . . . . . . . . . 231 --
(Increase) decrease in accounts
receivable. . . . . . . . . . . . . (126) 558
Decrease in prepaid and other
current assets. . . . . . . . . . . 202 78
(Decrease) in accounts payable. . . . (524) (821)
(Decrease) in deferred revenue. . . . (11) (24)
Increase in accrued and
other liabilities . . . . . . . . . 83 266
Increase in lease exit cost
liability . . . . . . . . . . . . . 102 --
---------- ----------
Net cash flows provided by
(used in) operating
activities. . . . . . . . . . 152 (897)
---------- ----------
Cash flows used in investing activities:
Purchases of property and equipment . -- (24)
Capitalized web site development
costs . . . . . . . . . . . . . . . (105) (117)
---------- ----------
Net cash used in
investing activities. . . . . (105) (141)
---------- ----------
Cash flows provided by (used in)
financing activities:
Advances on notes payable . . . . . . -- 1,500
Repayment of debt obligations . . . . -- (763)
---------- ----------
Net cash provided by
financing activities. . . . . -- 737
---------- ----------
Net increase (decrease) in cash . . . . 47 (301)
Cash and cash equivalents,
beginning of period . . . . . . . . . 4,867 5,144
---------- ----------
Cash and cash equivalents,
end of period . . . . . . . . . . . . $ 4,914 $ 4,843
========== ==========

Supplemental schedule of cash
flow information:
Cash paid for interest. . . . . . . . $ -- $ 29
========== ==========

The accompanying notes are an integral part of the financial statements.

COOLSAVINGS, INC.
NOTES TO FINANCIAL STATEMENTS
(in thousands, except share and per share data)
(UNAUDITED)

1. BASIS OF PRESENTATION:

CoolSavings, Inc. (the "Company") is a direct marketing and media
company that provides smarter solutions to connect marketers to their
target consumers by leveraging the Company's distribution network, analytic
services and proprietary technology. Under the Company's established
brand, advertisers can deliver, target and track a wide array of
incentives, including printed and electronic coupons, personalized e-mails,
rebates, samples, trial offers, sales notices, and gift certificates to
promote sales of products or services in stores or online.

The Company has sustained significant net losses from operations
since its inception. The Company's ability to meet its obligations in the
ordinary course of business is dependent upon its ability to establish and
maintain profitable operations. If the Company is unsuccessful in
maintaining cash flow positive operations, or if Landmark Communications,
Inc. and Landmark Ventures VII, LLC (together, "Landmark") exercise certain
repayment rights in connection with Landmark's financing relationship with
the Company, the Company's ability to continue to operate the business will
be jeopardized.

The Company's independent auditors have issued their report on its
financial statements for 2002 with an explanatory paragraph. The
explanatory paragraph describes the uncertainty as to the Company's ability
to continue as a going concern.

These financial statements are presented in accordance with the
requirements of Form 10-Q and consequently do not include all the
disclosures required in the financial statements included in the Company's
most recently filed Annual Report on Form 10-K. These financial statements
should be read in conjunction with the financial statements and related
notes in the Form 10-K.

In the opinion of the Company, the accompanying unaudited financial
statements reflect all normal recurring adjustments necessary for a fair
statement of the Company's financial position as of March 31, 2003, and its
results of operations and cash flows for the three months ended March 31,
2003 and 2002. These quarterly results of operations are not necessarily
indicative of those expected for the year.

2. STOCK-BASED COMPENSATION:

Financial Accounting Standards Board ("FASB") Statement of Accounting
Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation"
encourages, but does not require, companies to record compensation cost for
stock-based compensation at fair value. As permitted by SFAS 123,
"Accounting for Stock Based Compensation," the Company continues to apply
the accounting provisions of APB Opinion Number 25, "Accounting for Stock
Issued to Employees" with regard to the measurement of compensation cost
for options granted. Accordingly, compensation cost for stock options is
measured as the excess, if any, of the fair market value of a share of the
Company's stock at the date of the grant over the amount that must be paid
to acquire the stock. The Company recognized $0 of compensation expense in
the three months ended March 31, 2003 and March 31, 2002, in conjunction
with grants made under its fixed stock option plans.

The Company has adopted the disclosure requirements of SFAS 148,
"Accounting for Stock Based Compensation - Transition and Disclosure - An
Amendment of FASB Statement No. 123." No stock option grants were issued
during the three months ended March 31, 2003. Had expense been recognized
using the fair value method described in SFAS 123, the Company would have
reported the following results of operations using the Black-Scholes option
pricing model:

Three Months Ended
March 31,
------------------------
2003 2002
---------- ----------
Net loss applicable to common
stockholders, as reported . . . . . . . $ (1,418) $ (2,749)

Deduct: Stock-based employee
compensation expense determined
under fair value based method
for all awards, net of related
tax effects . . . . . . . . . . . . . . (371) (610)
---------- ----------
Pro forma net loss applicable to
common stockholders . . . . . . . . . . $ (1,789) $ (3,359)
========== ==========

Weighted average shares outstanding . . . 39,093,660 39,093,660

Earnings per share:
Basic and diluted - as reported . . . . $ (0.04) $ (0.07)
Basic and diluted - pro forma . . . . . $ (0.05) $ (0.09)
========== ==========

These costs may not be representative of the total effects on
proforma reported income for future years. Factors that may also impact
disclosures in future years include the attribution of the awards to the
service period, the vesting period of stock options, the timing of
additional grants of stock option awards and the number of shares granted
for future awards.

The assumptions used for valuations of stock option grants calculated
in accordance with SFAS 123 are as follows:

Three Months Ended
March 31,
------------------------
2003 2002
---------- ----------

Annualized dividend yield . . . . . . . . -- 0.00%
Risk-free rate of return. . . . . . . . . -- 4.21%
Expected option term (in years) . . . . . -- 5.00
Expected volatility . . . . . . . . . . . -- 247.63%

3. RECENT ACCOUNTING PRONOUNCEMENTS:

In January 2003, the FASB issued Interpretation No. 46,
"Consolidation of Variable Interest Entities, an Interpretation of ARB
No. 51," which requires all Variable Interest Entities ("VIEs") to be
consolidated by the primary beneficiary. The primary beneficiary is the
entity that holds the majority of the beneficial interests in the VIE. In
addition, the interpretation expands disclosure requirements for both VIEs
that are consolidated as well as VIEs of which the entity is the holder of
a significant percentage of the beneficial interests, but not the majority.

The disclosure requirements of this interpretation are effective
immediately, and implementation is effective for periods beginning after
June 15, 2003. The Company does not expect this Interpretation to have a
material impact on its financial position or results of operations.

In January 2003, the FASB issued EITF No. 00-21, "Revenue
Arrangements with Multiple Deliverables" ("EITF 00-21"). EITF 00-21
provides guidance on how to determine whether an arrangement involving
multiple deliverables contains more than one unit of accounting and how
arrangement consideration should be measured and allocated to the separate
units of accounting in the arrangement. EITF 00-21 will be effective for
arrangements entered into in fiscal periods beginning after June 15, 2003.
The Company does not expect that the provisions of EITF 00-21 will have a
material impact on its financial position or results of operations.

The Company adopted SFAS No. 143, "Accounting for Asset Retirement
Obligations" ("SFAS 143"), which addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-
lived assets and the associated asset retirement costs. The adoption of
SFAS 143 did not have a material impact on the Company's financial position
or results of operations.

The Company adopted Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees
of Indebtedness of Others," which expands previously issued accounting
guidance and disclosure requirements for certain guarantees. The
Interpretation requires an entity to recognize an initial liability for the
fair value of an obligation assumed by issuing a guarantee. The provision
for initial recognition and measurement of the liability will be applied on
a prospective basis to guarantees issued or modified after December 31,
2002. This adoption did not have a material impact on the Company's
financial position or results of operation.

4. BANK LINES OF CREDIT AND OTHER LOANS:

a. Bank Lines of Credit:

During 2002, the Company had two separate credit facilities, both of
which expired as of December 31, 2002.

Under a credit facility with American National Bank (the "ANB
Facility"), the Company had one term loan and one $3,000 revolving credit
line. Both the term loan and the revolving credit line were payable in
installments and collateralized by substantially all the assets of the
Company. During 2002, the Company had restricted certificates of deposit of
$231 which related to letters of credit which were issued under the credit
line and expired on December 31, 2002. The restrictions on the
certificates of deposit were removed on January 1, 2003.

Under a credit facility with Midwest Guaranty Bank (the "Midwest
Facility"), the Company had a $1,000 equipment line of credit. Borrowings
were collateralized by the specific equipment purchased and were payable in
installments. The Midwest Facility expired on December 31, 2002.

b. Landmark Loans:

In 2001, Landmark loaned the Company $5,000 pursuant to a senior
secured note, which loan is due on June 30, 2006 (the "Senior Secured
Loan"). The Senior Secured Loan is governed by the terms of an amended and
restated senior secured loan and security agreement dated July 30, 2001, as
amended (the "Amended and Restated Loan Agreement"). The Senior Secured
Loan is secured by a lien on all of the Company's assets and bears interest
at 8.0% per annum. The interest is paid quarterly in arrears in the form of
additional notes and warrants (described below). The Company has the right
to prepay the Senior Secured Loan on or after the third anniversary thereof
if certain conditions are met. The Amended and Restated Loan Agreement
also contains financial covenants and negative and affirmative covenants
that, among other things, restrict the Company's ability to incur
additional indebtedness and take other actions without the consent of
Landmark. At March 31, 2003, the Company was not in compliance with
certain financial covenants of the Senior Secured Loan. Defaults under the
Senior Secured Loan and the Amended and Restated Loan Agreement which
defaults cannot be cured, as the Senior Secured Loan and Grid Note have
cross-default provisions and are cross-collateralized include:

.. The Company's failure to achieve a prescribed amount of billings
during 2002; and

.. The Company's failure to maintain a minimum level of working capital
and a ratio of cash, cash equivalents and certain receivables over
current liabilities; and

.. The Company's failure to maintain a minimum ratio of total
indebtedness over tangible net worth.

These failures constitute events of default. Consequently, the
Senior Secured Loan and all accrued interest thereon are immediately due
and payable at the option of Landmark. Accordingly, the Company has
classified the Senior Secured Loan as currently payable as of March 31,
2003, which, including principal and the paid-in-kind interest which has
been compounded and accrued on the principal balance, totals $5,781.

In connection with the Senior Secured Loan, the Company issued to
Landmark warrants to purchase the Company's common stock (the "Landmark
Warrants"). The Landmark Warrants have a term of eight years (expiring
July 30, 2009) and may be exercised in whole or in part immediately. The
Landmark Warrants contain a net exercise feature and were exercisable for
10,000,000 shares of the Company's common stock at an exercise price of
$0.50 per share on November 12, 2001 (increasing to $0.75 per share on
July 30, 2005, if not previously exercised). The Company automatically
issues to Landmark additional warrants to purchase two shares of common
stock for each dollar of interest accrued and paid-in-kind on a quarterly
basis (January 31, April 30, July 31 and October 31) on the Senior Secured
Loan as paid-in-kind interest. As of January 31, 2003, the Landmark
Warrants were exercisable for 11,028,758 shares of the Company's common
stock.

5. REDEEMABLE PREFERRED STOCK:

a. Series B Preferred Stock:

On November 12, 2001, pursuant to a securities purchase agreement
between Landmark and the Company, dated July 30, 2001, as amended (the
"Securities Purchase Agreement"), the Company issued to Landmark 65,057,936
shares of $0.001 par value Series B preferred stock (the "Series B
Preferred Stock") in exchange for cancellation of $10,108 of outstanding
indebtedness from the Company to Landmark under the Grid Note (defined
below). The Series B Preferred Stock has certain conversion rights and
bears an 8% annual dividend, payable quarterly in additional shares of
Series B Preferred Stock.

Under the terms of the Securities Purchase Agreement, the Company
agreed that, if certain events occurred prior to December 31, 2002, defined
herein as "Shortfall Events", Landmark would have the right to acquire
additional shares of Series B Preferred Stock at a price of $0.1554 per
share. The number of shares would equal the "Shortfall Amount" (generally
the cash needed by the Company in connection with a Shortfall Event)
divided by $0.1554. Under a letter dated November 12, 2001, the Company
agreed that, when Shortfall Events occurred, Landmark could elect to loan
the Company the Shortfall Amount under a grid note, as amended (the "Grid
Note").

On October 24, 2002, in connection with a Shortfall Event which
occurred on June 30, 2002 (related to the amount of current assets compared
to current liabilities at such date), Landmark exercised its right to
purchase 17,825,212 shares of Series B Preferred Stock and paid the Company
$2,770 for such shares ($0.1554 per share). On December 20, 2002,
Landmark, at the Company's request, applied the $8,770 of principal and
$705 of accrued interest then outstanding under the Grid Note toward the
purchase of 60,967,777 shares of Series B Preferred Stock. As of March 31,
2003, Landmark holds 150,422,668 shares of Series B Preferred Stock (and
has rights with respect to accrued dividends thereon) and holds a warrant
to purchase 11,028,758 shares of the Company's common stock. For the three

months ended March 31, 2003, dividends in the amount of 3,008,453 shares of
Series B Preferred Stock accrued and dividends in the amount of 1,822,566
shares of Series B Preferred Stock were declared to the holders of Series B
Preferred Stock. The Series B Preferred Stock is subject to certain
redemption requirements outside the control of the Company. As a result of
the defaults under the Amended and Restated Loan Agreement, Landmark may,
at its option, require the Company to redeem all of the issued and
outstanding Series B Preferred Stock at any time. Landmark also has the
right to elect not less than a majority of the Company's board of
directors.

Landmark's ownership will continue to increase due to the issuance of
additional shares of Series B Preferred Stock for dividends accruing on
issued Series B Preferred Stock. Landmark's ownership also will increase
if it exercises the Landmark Warrants. The number of Landmark Warrants
will continue to increase as "in-kind" payments are made for interest
accruing on the Senior Secured Loan.

As of March 31, 2003, the Company has reserved approximately
165,000,000 shares of common stock for the conversion of all the
outstanding shares of Series B Preferred Stock and accrued dividends, and
the exercise of all outstanding Landmark Warrants.

b. Series C Preferred Stock:

As a condition to the consummation of the Landmark purchase of
Series B Preferred Stock on November 12, 2001, the Company issued to three
individuals (two of whom are directors of the Company) 13,000,000 shares of
$0.001 par value Series C preferred stock (the "Series C Preferred Stock").
The Series C Preferred Stock was issued in exchange for certain notes held
by those individuals, the related accrued interest and the accompanying
warrants to purchase 1,050,000 shares of common stock previously issued to
such individuals. As of March 31, 2003, the Company has reserved
13,000,000 shares of common stock for the conversion of all the outstanding
shares of Series C Preferred Stock.

c. Conversion of Series B and C Preferred Stock

As of March 31, 2003, the Company had outstanding 39,093,660 shares
of common stock, 150,422,668 shares of Series B Preferred Stock, and
13,000,000 shares of Series C Preferred Stock. The shares of both classes
of Preferred Stock of the Company are convertible at the option of the
holders into shares of common stock on a one-for-one basis, subject to
antidilution provisions of the Company's Certificate of Incorporation. If
all the outstanding shares of Preferred Stock of the Company were converted
into shares of common stock, 202,516,328 shares of common stock would have
been outstanding as of March 31, 2003.

6. IMPAIRMENT OF LONG-LIVED ASSETS AND COSTS ASSOCIATED WITH EXIT
ACTIVITIES:

During 2002, following a study of its future expected space
requirements, the Company determined that a significant portion of its
leased office space and the assets associated with that office space were
unnecessary for its future operations. In accordance with SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets", the
Company determined that the estimated undiscounted cash flows expected to
be generated by the assets were less than their net book value. Therefore,
the Company recorded an operating expense of $1,233 in 2002 to write down
the assets to their estimated fair value. In addition, in accordance with
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities", the Company recorded an operating expense of $2,110 in 2002,
representing the estimated future lease obligations related to the office
space and estimated costs associated with subleasing the space, net of
estimated cash flows from future sublease arrangements.

During the three months ended March 31 2003, the Company re-evaluated
its future expected space requirements given current market conditions and
future outlook and determined that an additional portion of its leased
office space and the assets associated with that office space were
unnecessary for its future operations. The Company also revised its
estimate of the future net costs associated with office space determined to
be unnecessary for its future operations. As a result of this re-
evaluation, the Company recorded an additional operating expense of $209 in
the three months ended March 31, 2003, representing an adjustment to the
estimated future lease obligations related to the office space and
estimated costs associated with subleasing and disposing of the space, net
of estimated cash flows from future sublease arrangements. In addition,
the Company recorded an operating expense of $81 in the three months ended
March 31, 2003 to write down the assets related to the office space to
their estimated fair value.

Significant assumptions were required concerning the estimated fair
value of the assets. As provided under SFAS No. 144, the Company primarily
used discounted cash flow analysis, together with other available
information, to estimate the fair values.

For the three months ended March 31, 2003, lease exit costs consisted
of the following:
Three Months Ended
March 31,
(Unaudited)
------------------------
2003 2002
---------- ----------
Lease obligation, net of estimated
sub-lease income. . . . . . . . . . . . $ 165 $ --
Broker commissions and other
miscellaneous costs . . . . . . . . . . 44 --
---------- ----------
Lease exit costs. . . . . . . . . . . . . $ 209 $ --
========== ==========

At March 31, 2003, the liability associated with the lease exit costs
consisted of the following:

Balance at Subsequent Balance at
December 31,Accruals, March 31,
2002 Net Payments 2003
----------- ---------- -------- -----------
Lease obligation,
net of estimated
sub-lease income . . . $ 1,090 $ 165 $ (77) $ 1,178
Broker commissions
and other trans-
action costs . . . . . 235 44 (30) 249
-------- -------- -------- --------
Total lease exit
liability. . . . . . . 1,325 209 (107) 1,427

Less: current
portion of
lease exit
liability. . . . . . . (311) (455)
-------- --------
Long-term lease
exit liability . . . . $ 1,014 $ 972
======== ========

Any change in this estimate, based on the availability of new or
updated information, will be recorded in the period that it occurs.

7. EARNINGS PER SHARE:

FASB SFAS No. 128 requires companies to provide a reconciliation of
the numerator and denominator of the basic and diluted earnings per share
computations. The calculation below provides net loss, weighted average
common shares outstanding and the resultant net loss per share on both a
basic and diluted basis for the three months ended March 31, 2003 and 2002.

The calculation of diluted net loss per share excludes shares of common
stock issuable upon the exercise of employee stock options and investor
warrants and the conversion of the preferred stock as the effect of such
exercises and conversions would be anti-dilutive.

Three Months Ended
March 31,
(Unaudited)
------------------------
2003 2002
---------- ----------
Numerator:
Net loss. . . . . . . . . . . . . . . . $ (950) $ (2,545)
Cumulative dividend on Series B
Preferred Stock. . . . . . . . . . . . (468) (204)
---------- ----------
Loss applicable to common stockholders. $ (1,418) $ (2,749)
========== ==========

Basic and diluted loss per share. . . . . $ (0.04) $ (0.07)
========== ==========

Denominator:
Weighted average shares used in the
calculation of basic and diluted
loss per share . . . . . . . . . . . . 39,093,660 39,093,660
========== ==========

8. STOCK OPTION COMPENSATION:

During the first quarter of 2003, the Company did not grant any stock
options to purchase shares of common stock pursuant to the 2001 Stock
Option Plan.

9. COMMITMENTS AND CONTINGENCIES:

a. LETTERS OF CREDIT

During 2002, the Company maintained five letters of credit totaling
$1,747, net of a $231 restricted certificate of deposit to secure a line of
credit. These letters of credit collateralized the lease deposits for the
Company's office facilities in Chicago, New York, and San Francisco. All
letters of credit expired as of December 31, 2002.

On August 31, 2002, the Company entered into an Amended and Restated
Reimbursement and Security Agreement (the "Reimbursement Agreement") with
Landmark. On behalf of the Company, Landmark applied for and received
letters of credit in the aggregate amount of $1,599 from Wachovia Bank
("Wachovia") to collateralize lease deposits on the Company's office
facilities (the "Landmark Letters of Credit"). Under the Reimbursement
Agreement, the Company has agreed, among other things, to reimburse
Landmark for all amounts that Landmark is required to pay Wachovia under
the bank agreement related to the Landmark Letters of Credit, including all
fees, penalties, interest and amounts in connection with draws on the
Landmark Letters of Credit. The Landmark Letters of Credit were renewed in
March and April of 2003 for periods of one year. Landmark may, in its sole
discretion, cancel such Letters of Credit upon ninety (90) days' written
notice to the Company. If the Landmark Letters of Credit so expire or are
cancelled, the Company will need to enter into an alternate credit
arrangement.

Effective March 31, 2003, the Company terminated its lease of office
facilities in New York, resulting in a reduction of $92 in the Landmark
Letters of Credit in April 2003.

b. LITIGATION

On October 21, 1998, the Company instituted a lawsuit in the Northern
District of Illinois against Catalina Marketing International, Inc. and its
affiliate, Supermarkets Online, Inc. (together with Catalina Marketing
International, Inc. "Catalina Marketing"), for infringement of the
Company's United States Patent No. 5,761,648 (the "'648 Patent") seeking
unspecified damages and a permanent injunction against further
infringement. The defendants filed counterclaims alleging the invalidity
and unenforceability of the '648 patent and sought unspecified damages and
injunctive relief. In addition, on February 18, 2000, Catalina Marketing
filed a request for re-examination of the '648 Patent with the United
States Patent and Trademark Office, which request was granted on May 2,
2000. Therefore, the '648 Patent will be re-examined, which may result in
the patent being narrowed in scope or declared invalid. On February 21,
2003, the Company settled this lawsuit and agreed to pay Catalina Marketing
$350. The settlement dismissed all claims and counterclaims of the
parties, including claims for attorneys' fees and expenses, with prejudice.

The payment of this settlement was shared with a third party, resulting in
a net expense to the Company of $150. The Company recorded this net
expense as a charge to general and administrative expense in 2002.

On November 15, 1999, Catalina Marketing filed a separate lawsuit
against the Company in the United States District Court for the Middle
District of Florida. The complaint alleges that the Company's systems and
methods infringe Catalina Marketing's United States Patent No. 4,674,041
(the "'041 Patent"), and seeks to enjoin the Company from further
infringing its patent. The case was transferred to the U.S. District Court
for the Northern District of Illinois, which ruled that the Company did not
infringe the '041 patent. On May 8, 2002, the United States Court of
Appeals for the Federal Circuit affirmed-in-part, reversed-in-part, and
vacated-in-part the non-infringement ruling of the U.S. District Court for
the Northern District of Illinois. As a result of this ruling, this
litigation is not concluded. The case has been remanded to the Northern
District for further proceedings to determine whether the Company has any
liability for infringement of the '041 patent. Discovery in this case is
ongoing, and trial has been set for January 2004. The Company will continue
to defend the action vigorously. An unfavorable outcome for the Company is
considered neither probable nor remote by the Company's management at this
time, and an estimate of possible loss or range of possible losses
currently cannot be made.

On February 12, 2000, Supermarkets Online, Inc. filed a lawsuit
against the Company in the United States District Court for the Central
District of California. The complaint alleges that the Company's systems
and methods infringe Supermarkets Online's United States Patent No.
6,014,634 (the "'634 Patent"), and seeks unspecified damages and injunctive
relief. On March 13, 2003, the Court removed the case from its active
caseload until further application by the parties or Order of the Court.
The Company has filed with the Patent and Trademark Office a request for
re-examination of the '634 patent, which request for re-examination was
granted in March 2001. An unfavorable outcome for the Company is considered
neither probable nor remote by the Company's management at this time, and
an estimate of possible loss or range of possible losses currently cannot
be made.

On August 23, 1999, the Company instituted a lawsuit in the Northern
District of Illinois against Brightstreet.com, Inc. ("Brightstreet") for
infringement of the '648 Patent, seeking unspecified damages and a
permanent injunction against further infringement. Brightstreet filed
counterclaims alleging the invalidity and unenforceability of the patent,
and sought unspecified damages and injunctive relief. The parties agreed to
a settlement of the lawsuit in open court on October 29, 2001.
Subsequently, Brightstreet objected to the report and recommendation of the

court that the written settlement agreement the Company presented most
accurately reflected the agreement reached by the parties. On July 8, 2002,
the United States District Court for the Northern District of Illinois
fully adopted the report and recommendation of the Magistrate Judge
concurring with the Company's belief that the litigation had been settled,
denied Brightstreet's objections to the report and recommendation, adopted
the written settlement agreement the Company presented, and dismissed the
case with prejudice. On August 9, 2002, Brightstreet appealed the ruling of
the District Court to the United States Court of Appeals for the Federal
Circuit (the "Federal Circuit"). Both parties have submitted written
positions to the Federal Circuit, which held an oral argument on May 9,
2003. An unfavorable outcome for the Company is considered neither probable
nor remote by the Company's management at this time, and an estimate of
possible loss or range of possible losses currently cannot be made.

The foregoing pending lawsuits, while pending for at least three
years, are nevertheless in the pre-trial discovery stage (except to the
extent we may have reached a settlement in the Brightstreet lawsuit) and
may not be resolved favorably to the Company. For example, the Company may
not prevail and prevent others from using its proprietary rights. The
Company may be required to alter or stop selling its services, or to pay
costs and legal fees or other damages in connection with these cases and
the various counterclaims that have been asserted against the Company, and
its patents or future patents may be found invalid or unenforceable.
However, an unfavorable outcome for the Company is considered neither
probable nor remote by the Company's management at this time, and an
estimate of possible loss or range of possible losses cannot currently be
made. Furthermore, additional counterclaims, separate lawsuits or other
proceedings may be brought against the Company to invalidate its patents or
force the Company to change its services or business methods.

In October 2002, the Company received a demand for arbitration from
Coupco, Inc. ("Coupco") relating to a dispute over the Company's obligation
to pay royalties under its Patent License Agreement with Coupco which was
executed on April 6, 2000. The Company has opposed Coupco's demand and is
currently investigating the factual and legal bases for Coupco's demand;
however, the Company recorded a charge in 2002 of $200 and a charge of $50
in the first quarter of 2003 for the full amount of the demand.

In February 2003, the Company received notice of entry of an order by
the United States Bankruptcy Court of the Northern District of California,
Division 3, approving a Settlement Agreement and Mutual Release with
Netcentives, Inc. (the "Netcentives Settlement"). Pursuant to the
Netcentives Settlement, the Company recorded, as a subsequent event, a gain
of $256 in its financial statements as a reduction of cost of revenues in
2002. In addition, the Netcentive Settlement released the Company from any
past or future obligation of payments to Netcentives, Inc. The Company had
recorded a charge of $321 for unpaid service fees to Netcentives, Inc. in
2001. This charge was reversed against cost of revenues as a subsequent
event in 2002.

Currently, the Company is involved in other legal proceedings arising
in the ordinary course of business, none of which is expected to have a
material adverse effect on its financial position or results of operations.

The Company may be involved in additional litigation, investigations
or other proceedings in the future. Any litigation, investigation or
proceeding, with or without merit, could be costly and time-consuming and
could divert management's attention and resources, which in turn could harm
the Company's business and financial results.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(dollar amounts are shown in thousands)

CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS

You should read the following discussion of our financial condition
and results of operations along with the financial statements and the
related notes included elsewhere in this report. This discussion contains
forward-looking statements based on our current expectations, assumptions,
estimates and projections. We have tried to identify these statements by
using words such as "believe," "expect," and similar expressions, but that
is not the exclusive means of identifying such statements. Our actual
results could differ materially from those expressed in or implied by these
forward-looking statements as a result of numerous risks, uncertainties and
other factors, including, without limitation, our ability to obtain
additional debt and/or equity financing, our ability to protect our
patents, trademarks and proprietary rights, and the proliferation of
unsolicited email on the Internet which creates a negative public
perception of Internet marketing. For a discussion of these and other
risks, uncertainties and other factors which could cause actual results to
differ from those expressed in or anticipated by the forward-looking
statements, see "Risk Factors" below.

We undertake no obligation to update any of the forward-looking
statements after the date of this report to conform these statements to
actual results or otherwise to reflect new developments or changed
circumstances, unless expressly required by applicable federal securities
laws.

OVERVIEW

We are an online direct marketing and media company with a database
of more than 25 million registered households. We help marketers reach
their target consumers by leveraging our broad distribution network,
sophisticated analytics and proprietary technology. Our mission is to be
the leading provider of promotional offers to consumers while most
effectively connecting marketers to their best customers. Utilizing a
growing database of registered consumers, we supply marketers with a single
resource for accessing and engaging a dynamic group of shoppers. Through
our customized, integrated direct marketing and media products, advertisers
can target a wide array of incentives, including printed and electronic
coupons, personalized e-mails, rebates, trial offers, samples, sales
notices and sweepstakes to promote sales of products or services and drive
customers into brick-and-mortar stores or online web sites. In addition,
our proprietary database technology tracks consumer response, shopping
preferences and site behavior at the household and shopper level to provide
our clients with a market leading breadth of sophisticated consumer data
which they may use to make smarter marketing decisions.

Our web site, coolsavings.com, offers consumers convenient and
personalized incentives for goods and services from a broad range of
advertisers, including brick-and-mortar retailers, online retailers,
consumer packaged goods manufacturers, and travel and financial service
providers.

CRITICAL ACCOUNTING POLICIES

We have prepared the financial information in this report in
accordance with generally accepted accounting principles of the United
States of America. The preparation of these financial statements requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets
and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting periods. Management
bases its estimates and judgments on historical experience and various
other factors that are believed to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying

value of assets and liabilities that are not readily apparent from other
sources. Our critical accounting policies include revenue recognition,
estimating sales credits and the allowance for doubtful accounts,
capitalization of web site development costs, the valuation of long-lived
assets including estimates and judgments related to the impairment of such
long-lived assets, lease exit costs and intangible assets. For a discussion
of these critical accounting policies, see "Summary of Significant
Accounting Policies" in CoolSavings' Form 10-K for the year ended
December 31, 2002, filed with the SEC.

RECENT DEVELOPMENTS

On October 21, 1998, we instituted a lawsuit in the Northern District
of Illinois against Catalina Marketing International, Inc. and its
affiliate Supermarkets Online, Inc. (together with Catalina Marketing
International, Inc., "Catalina") for infringement of our United States
Patent No. 5,761,648 (the " '648 Patent"), seeking unspecified damages and
a permanent injunction against further infringement. Catalina filed
counterclaims alleging the invalidity and unenforceability of our patent
and sought unspecified damages, attorneys' fees and injunctive relief. On
February 21, 2003, we settled this lawsuit and agreed to pay Catalina $350.

The settlement dismissed all claims and counterclaims of the parties,
including claims for attorneys' fees and expenses, with prejudice. We
shared the payment of this settlement with a third party, resulting in a
net expense to us of $150. We recorded this net expense as a charge to
general and administrative expenses in 2002.

In February of 2003, we received notice of entry of an order by the
United States Bankruptcy Court of the Northern District of California,
Division 3, approving a Settlement Agreement and Mutual Release with
Netcentives, Inc. (the "Netcentives Settlement"). Pursuant to the
Netcentives Settlement, we recorded a gain of $256, which was recorded in
our financial statements as a reduction of cost of revenues in 2002. In
addition, the Netcentives Settlement released us from any past or future
obligation of payments to Netcentives, Inc. We recorded a charge of $321
for unpaid service fees to Netcentives, Inc. in 2001. This charge was
reversed against cost of revenues in 2002.

As of March 31, 2003, dividends in the amount of 3,008,453 shares of
Series B Preferred Stock have been accrued "in-kind" on the existing shares
of Series B Preferred Stock declared and paid those dividends on April 1,
2003.

REVENUE

ONLINE DIRECT MARKETING SERVICES REVENUE

We generate substantially all of our revenues by providing online
marketing services to our advertisers.

We charge our advertisers on a variety of bases, the most common of
which include:

. the number of e-mails delivered to members, commonly sold on
a cost per thousand, or CPM, basis;

. the number of times members click on an incentive linking the
member to the advertiser's web site (known as a click-through
response); and

. the number of purchases made or qualified leads generated.

Our pricing depends upon a variety of factors, including, without
limitation, the degree of targeting, the duration of the advertising
contract and the number of offers delivered. The degree of targeting refers
to the number of identified household or member attributes, such as gender,
age, or product or service preferences, used to select the audience for an
offer. Generally, the rates we charge our advertisers increase as the
degree of targeting and customization increases. Revenues subject to time-
based contracts are recognized ratably over the duration of the contract.
For contracts based on certain performance or delivery criteria, revenues
are recognized in the month performance is delivered to the customer. Most
of our advertising contracts have stated terms of less than one year and
may include earlier termination provisions. In the three month period
ended March 31, 2003, our largest advertiser accounted for 5.4% of our
revenues and our top five advertisers together accounted for approximately
19.0% of our revenues, as compared to 9.3% and 23.9%, respectively, in the
same period of 2002.

Our revenues for each period depend on a number of factors including
the number of advertisers sending promotional offers to our members, the
size of our membership base and the responsiveness of our members to each
promotion. We believe that our revenues will continue to be subject to
seasonal fluctuations in accordance with general patterns of retail
advertising spending, which is typically highest during the last half of
the third quarter and first half of the fourth quarter. In addition,
expenditures by advertisers tend to be cyclical, reflecting overall general
economic conditions and consumer buying patterns. If purchasing patterns
or timing of purchasing by advertisers change, our operations and quarter-
to-quarter comparisons could be affected materially.

CONSULTING SERVICES REVENUE

By analyzing individual, demographic and correlative information in
our database, we provide advertisers with several methods to gain insight
into our members' preferences. We can also apply our analytic
infrastructure to analyze the databases of our advertisers upon their
request. We use sophisticated data mining tools to help our advertisers
execute effective promotional campaigns, and we use the collected
information to create predictive models to make future targeting even more
effective. Using e-mail, we can also contact and survey members who have
responded to a specific offer. Approximately 2% of our revenue was
generated from consulting services during the three month period ended
March 31, 2003.

LICENSING REVENUE

We license portions of our intellectual property, including our
issued patents, to third parties. Approximately 1% of our revenue was
generated from royalty and license fees and other miscellaneous sources
during the three month period ended March 31, 2003.

EXPENSES

COST OF REVENUES

Our cost of revenues consists primarily of Internet connection
charges, web site equipment depreciation, salaries and related benefits of
operations personnel, fulfillment costs related to member loyalty
incentives and other directly related operations costs.

SALES AND MARKETING

Sales and marketing expenses include salaries, sales commissions,
employee benefits, travel and related expenses of our direct sales force,
advertising and promotional expenses, marketing, and sales support
functions. Marketing costs associated with increasing our member base and
other marketing expenses related to our products and services are expensed
in the period incurred.

PRODUCT DEVELOPMENT

Product development costs include expenses for the development of new
or improved technologies designed to enhance the performance of our
service, including employee salaries, employee benefits, amortization of
capitalized website development costs, and related expenses for our
technology department, as well as costs for contracted services and
equipment.

GENERAL AND ADMINISTRATIVE

General and administrative expenses include salaries, employee
benefits and expenses for our executive, finance, legal and human resources
personnel. In addition, general and administrative expenses include fees
for professional services and occupancy costs.

LEASE EXIT COSTS AND LOSS ON ASSET IMPAIRMENT

Lease exit costs and Loss on asset impairment reflect costs
associated with our determination that a significant portion of our leased
office space was unnecessary for our future operations. During 2002 and
2003, we recorded lease exit costs representing the estimated future lease
obligations related to the unnecessary leased office space, and estimated
costs associated with subleasing the space, net of estimated cash flows
from future sublease arrangements. We also determined that the estimated
undiscounted cash flows expected to be generated by these assets in the
unnecessary, unoccupied office space were less than their net book value.
Therefore, we recorded losses on asset impairment to write-down the assets
to their estimated fair value.

Significant assumptions about the timing of a sale or inclusion of
these assets in a future sublease were required in making the estimate of
fair value for these assets. As provided under SFAS No. 144, we primarily
used discounted cash flow analysis, together with other available
information, to estimate the fair values.

RESULTS OF OPERATIONS

THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO THREE MONTHS ENDED
MARCH 31, 2002

NET REVENUES

Net revenues increased 32% to $7,624 in the three month period ended
March 31, 2003 from $5,763 in the three month period ended March 31, 2002.
The revenue increase was attributable to an increase in the number of new
member registrations and an increase in the number of revenue producing
actions initiated by our members.

COST OF REVENUES AND GROSS PROFIT

Cost of revenues decreased to $788 in the three month period ended
March 31, 2003, from $984 in the three month period ended March 31, 2002.
Gross profit increased as a percentage of net revenues to 90% in the three
month period ended March 31, 2003, from 83% in the three month period ended
March 31, 2002. The increase in gross profit is primarily due to the
decrease in amortization and depreciation in the first quarter of 2003 as
compared to the first quarter of 2002 caused by a decrease in capital
spending since mid-2001 and certain assets being fully amortized as of
December 31, 2002.

OPERATING EXPENSES

SALES AND MARKETING. Sales and marketing expenses increased to
$4,395, or 58% of net revenues in the three month period ended March 31,
2003, from $3,495, or 61% of net revenues, in the three month period ended
March 31, 2002. The $900 increase in sales and marketing expenses was
primarily due to higher online advertising expense compared to the same
period in 2002.

PRODUCT DEVELOPMENT. Product development expenses decreased to $754,
or 10% of net revenues, in the three month period ended March 31, 2003,
from $1,072, or 19% of net revenues, in the three month period ended
March 31, 2002. The $318 decrease in product development expenses was
primarily due to a decrease in the amortization of capitalized web site
costs as compared to the same period in 2002. A significant portion of our
capitalized web site costs are fully amortized.

GENERAL AND ADMINISTRATIVE. General and administrative expenses
decreased to $2,227, or 29% of net revenues, in the three month period
ended March 31, 2003, from $2,486, or 43% of net revenues, in the three
month period ended March 31, 2002. The $259 decrease in general and
administrative expenses was primarily due to a decrease in office rent of
$227, and a decrease in depreciation and amortization of approximately $157
due to the write down and disposal of assets in our office facilities.
Partially offsetting these decreases was an increase in payroll related
expenses of $91 compared to the same period in 2002.

LEASE EXIT COSTS AND LOSS ON ASSET IMPAIRMENT. During the three
months ended March 31 2003, we re-evaluated our future expected space
requirements given current market conditions and future outlook and
determined that an additional portion of our leased office space and the
assets associated with that office space were unnecessary for our future
operations. In accordance with SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities", we recorded an operating
expense of $209 in the three months ended March 31, 2003 representing an
adjustment to the estimated future lease obligations related to the
unnecessary office space and estimated costs associated with subleasing and
disposing of the space, net of estimated cash flows from future sublease
arrangements.

In accordance with SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets", we determined that the estimated
undiscounted cash flows expected to be generated by these assets were less
than their net book value. As a result, we recorded an operating expense of
$81 in the three months ended March 31, 2003 to write down the assets to
their estimated fair value. Significant assumptions about the timing of a
sale or inclusion of these assets in a future sublease were required in
making the estimate of fair value for these assets. As provided under SFAS
No. 144, we primarily used discounted cash flow analysis, together with
other available information, to estimate fair values.

LOSS FROM OPERATIONS. Our loss from operations was $830 for the
three month period ended March 31, 2003 compared to a loss of $2,274 for
the same period of 2002. The improvement or reduction of the loss was due
to the improvement in revenue reflecting the increase in new member
registrations and the number of revenue-producing actions initiated by
members. Our loss from operations included charges for lease exit costs
and asset impairment of $209 and $81, respectively, for the three months
ended March 31, 2003. We did not incur any lease exit costs or asset
impairment charges for the same period of 2002.

INTEREST INCOME (EXPENSE), NET. During the three month period ended
March 31, 2003, we incurred net interest expense of $120, as compared to
net interest expense of $271 for the three month period ended March 31,
2002. During the three month period ended March 31, 2003, net interest
expense decreased due to the conversion of the Grid Note balance to
Series B Preferred Stock in December 2002. No interest was incurred on the
Grid Note in the first three months of 2003.

LIQUIDITY AND CAPITAL RESOURCES

At March 31, 2003, we had approximately $4,914 in cash and cash
equivalents compared to $4,867 at December 31, 2002. Accounts receivable,
net of allowances for doubtful accounts, were $4,745 at March 31, 2003
compared to $4,900 at the end of 2002. At the end of the first quarter of
2003, our current liabilities totaled $12,046 compared to $11,901 at the
end of 2002.

Our independent auditors have issued their report on our financial
statements for 2002 with an explanatory paragraph. The explanatory
paragraph describes the uncertainty as to our ability to continue as a
going concern. If Landmark exercises some or all of its rights to
accelerate payment under our obligations to Landmark, our ability to
operate our business will be jeopardized.

We expect our current liquidity position to meet our anticipated cash
needs for working capital and capital expenditures, excluding potential
acquisitions, legal settlements or any accelerated payments to Landmark,
for the next 12 months. If cash generated from our operations is
insufficient to satisfy our cash needs, we may be required to raise
additional capital or issue additional debt. If we raise additional funds
through the issuance of equity securities, our stockholders may experience
significant dilution. Furthermore, additional financing may not be
available when we need it, or if available may not be on terms favorable to
us or to our stockholders. If financing is not available when needed or is
not available on acceptable terms, we may be unable to develop or enhance
our products or services. In addition, we may be unable to take advantage
of business opportunities or respond to competitive pressures. Any of
these events could have a material adverse effect on our business, results
of operations and financial condition.

Net cash provided by operating activities was $152 in the three month
period ended March 31, 2003. Net cash provided by operating activities
resulted mainly from the decrease in restricted certificates of deposit of
$231 associated with the collateral on our Letters of Credit. The
restrictions on the certificates of deposit were lifted on January 1, 2003.

Net Cash used by operating activities was $897 in the three month period
ended March 31, 2002. The improvement reflects our reduction in net loss,
payment of payables and accrued liabilities.

Net cash used in investing activities was $105 in the three month
period ended March 31, 2003 as compared to $141 for the same period of
2002. Net cash used in investing activities resulted primarily from
amounts used in developing our web site.

Since our inception, we have financed our operations primarily
through the sale of our stock and the issuance of notes payable. In June
and July 2001, we received proceeds of $5,000 from loans to us by Landmark
(the "Senior Secured Loan"). The Senior Secured Loan is payable on June 30,
2006 and bore interest at 12.0% per annum until November 12, 2001, at which
time the interest rate was reduced to 8.0% per annum. The interest is paid
quarterly in arrears in the form of additional notes and warrants
(described below). We have the right to prepay the Senior Secured Loan on
or after the third anniversary thereof if certain conditions are met. The
Senior Secured Loan also contains financial covenants and negative and
affirmative covenants that, among other things, restrict our ability to
incur additional indebtedness and take other actions without the consent of
Landmark. At March 31, 2003, we were not in compliance with certain
financial covenants of the Senior Secured Loan. This failure to comply
constitutes an event of default. Consequently, the Senior Secured Loan
including accrued interest thereon is immediately due and payable at the
option of Landmark. Accordingly, we have classified the Senior Secured
Loan, including the paid-in-kind interest which has been compounded and
accrued on the principal balance, totaling $5,781, as currently payable as
of March 31, 2003.

In connection with the Senior Secured Loan, we issued a warrant to
Landmark (the "Landmark Warrant"). The Landmark Warrant has a term of
eight years and may be exercised in whole or in part immediately. The
Landmark Warrant contains a net exercise feature and was exercisable for
10,000,000 shares of our common stock at an exercise price of $0.50 per
share at November 12, 2001 (increasing to $0.75 per share on July 30, 2005
if not previously exercised). The number of shares exercisable under the
Landmark Warrant automatically increases by two shares of common stock for
each dollar of interest accrued on the Senior Secured Loan as paid-in-kind
interest.

The Series B Preferred Stock issued is redeemable at Landmark's
option at any time. As of March 31, 2003, Landmark held 150,422,668 shares
of Series B Preferred Stock (and has rights with respect to accrued
dividends thereon) and holds a warrant to purchase 11,028,758 shares of our
common stock. Landmark's ownership will continue to increase due to the
issuance of additional shares of Series B Preferred Stock for dividends
accruing on issued Series B Preferred Stock. Landmark's ownership also
will increase if it exercises the Landmark Warrants. The number of
Landmark Warrants will continue to increase as "in-kind" payments are made
for interest accruing on the Senior Secured Loan.

On August 31, 2002, we entered into an Amended and Restated
Reimbursement and Security Agreement (the "Reimbursement Agreement") with
Landmark. On our behalf, Landmark has applied for and received letters of
credit (the "Landmark Letters of Credit") in the aggregate amount of $1,559
from Wachovia Bank to collateralize lease deposits on our office
facilities. Under the Reimbursement Agreement, we have agreed, among other
things, to reimburse Landmark for all amounts that Landmark is required to
pay Wachovia under the bank agreement related to the Landmark Letters of
Credit, including all fees, penalties, interest and amounts in connection
with draws on the Letters of Credit. We have secured such obligations with
a lien on all of our assets. If we fail to pay Landmark any amount when
due, interest will accrue and compound on all such amounts at the rate of
7% per annum until such time as Landmark demands payment. Upon Landmark's
demand for payment, interest will accrue and compound on all such amounts
at the rate of 10% per annum from the date of the demand, increasing
monthly at a rate of 1%. We reimbursed Landmark $4 for fees related to the
Landmark Letters of Credit in 2002 and $0.3 in the three months ended
March 31, 2003. The Landmark Letters of Credit were renewed in March and
April of 2003 for periods of one year. Effective March 31, 2003, we
terminated our lease of office facilities in New York. This resulted in a
reduction of $92 in the Landmark Letters of Credit in April 2003. Landmark
may, at its sole discretion, cancel such Letters of Credit on 90 days
written notice to us. If the Landmark Letters of Credit so expire or are
cancelled, we will need to enter into an alternate credit arrangement. If
an alternate arrangement is not available when required or is not available
on acceptable terms, our business, results of operations and financial
condition may be affected.

RECENT ACCOUNTING PRONOUNCEMENTS

In January 2003, the FASB issued Interpretation No. 46,
"Consolidation of Variable Interest Entities, an Interpretation of ARB
No. 51," which requires all Variable Interest Entities ("VIEs") to be
consolidated by the primary beneficiary. The primary beneficiary is the
entity that holds the majority of the beneficial interests in the VIE. In
addition, the interpretation expands disclosure requirements for both VIEs
that are consolidated as well as VIEs of which the entity is the holder of
a significant percentage of the beneficial interests, but not the majority.

The disclosure requirements of this interpretation are effective for all
periods beginning after June 15, 2003. We do not expect this
Interpretation to have a material impact on our financial position or
results of operations.

In January 2003, the FASB issued EITF No. 00-21, "Revenue
Arrangements with Multiple Deliverables" ("EITF 00-21"). EITF 00-21
provides guidance on how to determine whether an arrangement involving
multiple deliverables contains more than one unit of accounting and how
arrangement consideration should be measured and allocated to the separate
units of accounting in the arrangement. EITF 00-21 will be effective for
arrangements entered into in fiscal periods beginning after June 15, 2003.
We do not expect that the provisions of EITF 00-21 will have a material
impact on our financial position or results of operations.

We adopted SFAS No. 143, "Accounting for Asset Retirement
Obligations" ("SFAS 143"), which addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-
lived assets and the associated asset retirement costs. The adoption of
SFAS 143 did not have a material impact on our financial position or
results of operations.

We adopted Interpretation No. 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others," which expands previously issued accounting
guidance and disclosure requirements for certain guarantees. The
Interpretation requires an entity to recognize an initial liability for the
fair value of an obligation assumed by issuing a guarantee. The provision
for initial recognition and measurement of the liability will be applied on
a prospective basis to guarantees issued or modified after December 31,
2002. This adoption did not have a material impact on our financial
position or results of operation.

RISK FACTORS

You should carefully consider the risks, uncertainties and other
factors described below because they could materially and adversely affect
our business, financial condition, operating results, cash flow and
prospects, and/or the market price of our common stock.

WE MAY NOT BE ABLE TO SECURE FINANCING TO MEET OUR SHORT AND LONG
TERM CAPITAL NEEDS

At March 31, 2003, we had $4,914 of cash and cash equivalents. We
are in default under the terms of an amended and restated senior secured
loan and security agreement dated July 30, 2001 (the "Amended and Restated
Loan Agreement") with Landmark. The entire loan plus accrued interest,
totalling $5,781 at March 31, 2003, is immediately due and payable at the
option of Landmark. Secondly, Landmark could redeem its holding of $23,374
of our Series B Preferred Stock as of March 31, 2003 at any time. Although
Landmark has funded our recent cash needs, Landmark has reserved its rights
with respect to all breaches and defaults, and Landmark is under no
obligation to advance us any additional funds. If we are unable to
generate sufficient cash flows from operations or obtain continuing
financing, we may be unable to operate our business.

We have received a report from our independent auditors for our
fiscal year ended December 31, 2002 containing an explanatory paragraph
that describes the uncertainty as to our ability to continue as a going
concern due to our historical negative cash flow and because, as of the
date they issued their report, we did not have access to sufficient
committed capital to meet our anticipated needs for at least the next 12
months. See "Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources."

WE HAVE A HISTORY OF NET LOSSES AND EXPECT TO CONTINUE TO INCUR NET
LOSSES

We incurred net losses of $950 in the first quarter of 2003, $8,287
in 2002, $29,227 in 2001 and $39,240 in 2000. As of March 31, 2003, our
accumulated deficit was $98,816. We expect to continue to incur net losses
through the remainder of 2003. We may not be able to achieve or sustain
profitability in the future.

OUR UNPROVEN BUSINESS MODEL MAKES IT DIFFICULT TO EVALUATE OUR
BUSINESS

We launched our web site in February 1997, and operate in a market
that continues to change. We face risks, uncertainties, expenses and
difficulties frequently encountered by companies in new and rapidly
evolving markets, including the Internet advertising and direct marketing
markets. To address these risks and uncertainties, we must, among other
things:

. maintain relationships with existing advertisers and attract
additional advertisers;

. attract members who actively and repeatedly take advantage of
our offers and who make purchases, request information and
otherwise interact with our advertisers;

. attract, integrate, motivate and retain qualified personnel;

. enhance our brand recognition;

. develop new promotions and services;

. continue to upgrade and develop our systems and infrastructure
to accommodate growth in membership and service enhancements;

. anticipate and adapt to the evolving Internet advertising and
direct marketing markets and changes in advertisers'
promotional needs and policies;

. maintain and defend our intellectual property rights; and

. respond to changes in government regulations.

We may not be successful in accomplishing these objectives. Further,
we may not be able to generate or secure the necessary funding to achieve
these objectives. See "Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources."

OUR COMMON STOCK IS VOLATILE, HAS LIMITED PUBLIC LIQUIDITY AND MAY
LEAD TO LOSSES BY INVESTORS AND RESULT IN SECURITIES LITIGATION

Our common stock currently trades on the OTC Bulletin Board (OTCBB).
Stockholders may have difficulty buying and selling our stock on the OTCBB.
Since the OTCBB is a broker driven marketplace, we are dependent on
professional market makers to facilitate trading of our stock on the OTCBB.
If market makers do not register to trade our stock on the OTCBB,
stockholders may not have a public market for the purchase and sale of our
securities.

The market price of our common stock has been volatile and may be
subject to wide fluctuations. Since our public offering in May 2000, the
per share price of our common stock has fluctuated from a high of $7.13 per
share to a low of $0.03 per share. Factors that might cause the market
price of our common stock to fluctuate include, without limitation:

. quarterly variations in our operating results;

. operating results that vary from the expectations of securities
analysts and investors or from our own forecasts;

. interpretation of the effect of our Series B Preferred Stock
and Series C Preferred Stock on our overall capital structure;

. changes in expectations as to our future financial performance,
including our own forecasts and financial estimates by
securities analysts and investors;

. changes in market valuations of other Internet companies;

. changes in governmental regulation of the Internet or Internet
advertising, including any governmental inquiry of another
Internet company;

. loss of major advertisers;

. resolution of our pending or future patent litigation or other
changes in the status of our intellectual property rights;

. pursuit of significant claims or legal proceedings against us;

. announcements of technological innovations or new services by
us or our competitors;

. announcements by us or our competitors of significant
contracts, acquisitions, dispositions, strategic partnerships,
joint ventures or capital commitments;

. changes in our liquidity position;

. changes in key personnel;

. future sales of our common stock, including sales of common
stock acquired upon conversion of our Series B Preferred Stock;

. announcements of material events related to outstanding loans
to us; and

. volatility in the equity markets.

The market prices of the securities of Internet-related and
technology companies are often highly volatile and subject to wide
fluctuations that bear little relation to actual operating performance of
these companies. Also, some companies that have experienced volatility in
the market price of their stock have been subject to securities class
action litigation. Any securities class action litigation involving us
likely would result in substantial costs and a diversion of senior
management's attention and resources, and likely would harm our stock
price.

WE DERIVE MOST OF OUR REVENUES FROM CONTRACTS WITH OUR ADVERTISERS
THAT MAY BE CANCELLED ON 30-DAYS NOTICE

A majority of our current advertising contracts permit either party
to terminate the contract upon 30-days advanced written notice. We may be
unsuccessful in securing longer commitments. Some advertisers prefer short-
term contracts because they use our service to promote limited-time
promotional events or seasonal products and services. The possibility that
our advertising contracts can be terminated on 30-days advance written
notice makes it difficult for us to forecast our revenues. We may not be
able to renew our existing contracts or attract new advertisers.

OUR OPERATING RESULTS ARE SUBJECT TO SEASONAL FLUCTUATIONS

Our operating results are subject to seasonal fluctuations that may
make our stock price more volatile. Advertising sales in traditional
media, such as television and radio, generally are lower in the first and
third calendar quarters of each year. Further, Internet traffic typically
decreases during the summer months, which in turn may reduce the amount of
advertising to sell and deliver. We anticipate that our future revenues
will continue to reflect these seasonal patterns.

WE DEPEND ON COMPELLING PROMOTIONAL OFFERS BY OUR ADVERTISERS

Our members' usage of our services, and the resulting attractiveness
of our service to advertisers, depends upon the quality of the promotional
offers we deliver and our members' interest in them. In addition, under
some of our advertising contracts, our revenues depend on members'
responsiveness to specific promotions. We currently consult with our
advertisers about the type and frequency of incentives they offer, but we
cannot control their choice of promotions or their fulfillment of
incentives. If our advertisers' promotional offers are not attractive to
our members, we will not be able to maintain or expand our membership or
generate adequate revenues based on the size of our membership or on the
responses we produce. Moreover, if our members are not satisfied with the
offers our advertisers make available to them or with the products or
services they receive upon redemption of offers, their negative experiences
might result in publicity that could damage our reputation, which would
harm our efforts to attract and retain members and advertisers.

WE DEPEND ON THE SUCCESSFUL INTRODUCTION OF NEW SERVICES AND FEATURES

To retain and attract members and advertisers, we believe that we
will need to continue to introduce additional services and new features on
our web site. These new features and services may require us to spend
significant funds on product development and on educating our advertisers
and consumers about our new service offerings. New services and features
may contain errors or defects that are discovered only after introduction.
Correcting these defects may result in significant costs, service
interruptions, loss of advertisers' and members' goodwill and damage to our
reputation. In addition, our successful introduction of new technologies
will depend on our advertisers' ability to adapt to using these
technologies, over which we have no control. If we introduce a service or
feature that is not favorably received, our current members may use our web
site and other services less frequently, our existing advertisers may not
renew their contracts, and we may be unable to attract new members and
advertisers.

WE MUST BE ABLE TO ESTABLISH AND MAINTAIN RELATIONSHIPS WITH
OPERATORS OF OTHER WEB SITES TO ATTRACT NEW MEMBERS

We advertise on third-party web sites using banner advertisements to
attract potential new members. Competition for banner and sponsorship
placements on the highest traffic web sites is intense, and we may not be
able to enter into these relationships on commercially reasonable terms, or
at all. Even if we enter into or maintain our current relationships with
other web site operators, those sites may not attract significant numbers
of users or increase traffic to our web site.

INTELLECTUAL PROPERTY LITIGATION AGAINST US CONTINUES TO BE COSTLY
AND COULD RESULT IN THE LOSS OF SIGNIFICANT RIGHTS

We expect that, as the number of services and competitors in Internet
advertising and direct marketing grows, we will be increasingly subject to
intellectual property infringement, unfair competition and related claims
against us. Third parties may also seek to invalidate our United States
Patents, No. 5,761,648, entitled "Interactive Marketing Network and Process
Using Electronic Certificates" and No. 5,855,007, entitled "Electronic
Coupon Communication System." Currently, we are a defendant in two
lawsuits filed by a competitor, each of which alleges that our technology
or business methods infringe on the competitor's patent. The lawsuits
seek, among other things, to prevent us from using methods that allegedly
violate the competitor's patents. In addition, competitors have in the
past, and may in the future, name our customers as defendants in these
suits, which may cause these customers to terminate their relationships
with us. Our efforts to defend these actions may not be successful. Our
failure to prevail in this litigation could result in:

. our paying monetary damages, which could be tripled if the
infringement is found to have been willful;

. an injunction requiring us to stop offering our services in
their current form;

. our having to redesign our technology and business methods,
which could be costly and time-consuming, even where a redesign
is feasible; or

. our having to pay fees to license intellectual property rights,
which may result in unanticipated or higher operating costs.

Because of the ongoing technical efforts of others in our market and
the relatively recent introduction of our technology, we may continue to be
involved with one or more of our competitors in legal proceedings to
determine the parties' rights to various intellectual property, including
the right to our continued ownership of our existing patents. Our failure
to prevail in these proceedings could harm our business. See "Part II -
Item 1 - Legal Proceedings"

We cannot predict whether other third parties will assert claims of
infringement or similar charges against us, or whether any past or future
claims will harm our business. We believe that participants in our market
increasingly are attempting to obtain patent protection for their business
methods. We cannot predict when or if patents will result from these
efforts, or whether any of these third parties' patents will cover aspects
of our business. The details of currently pending United States patent
applications are not publicly disclosed until either the patent is issued
or 18 months from filing, depending on the application filing date. Any
third-party claim, with or without merit, could be time-consuming, result
in costly litigation and damages, cause us to reduce or alter our services,
delay or prevent service enhancements or require us to enter into royalty
or licensing agreements.

In addition, legal standards regarding the validity, enforceability
and scope of intellectual property in Internet-related businesses are
unproven and continue to evolve. In this legal environment, we may be
required to license other parties' proprietary rights in an effort to
clarify our ability to conduct business or develop new services. Royalty
or licensing agreements, if required, might not be available on terms
acceptable to us, or at all. If there is a successful claim of
infringement against us and we are unable to develop non-infringing
technology or license the infringed or similar technology on a timely
basis, our business could be substantially harmed.

PROTECTING OUR PATENTS, TRADEMARKS AND PROPRIETARY RIGHTS MAY BE
COSTLY AND MAY DISTRACT OUR MANAGEMENT

We regard the protection of our patent rights, copyrights, service
marks, trademarks, trade dress and trade secrets as important to our future
success. However, the steps we take to protect these and other proprietary
rights will be costly, may require significant management resources and may
be inadequate. If the steps we take are not adequate, we may lose license
revenues, and potential competitors may be more inclined to offer similar
products and services. Either of these possibilities could harm our
business.

PATENTS

Although we have two issued United States patents and several pending
United States and foreign patent applications directed to different aspects
of our technology and business processes:

. our United States patents and any other patent we may obtain
could be successfully challenged by third parties, which could
limit or deprive us of the right to prevent others from
exploiting the electronic certificate issuing and processing
method or other inventions claimed in our current or future
patents;

. current and future competitors could devise new methods of
competing with our business that are not covered by our issued
patents or any other patents we may obtain, or against which
our issued patents and any other patents we may obtain may be
ineffective;

. our pending patent applications may not result in the issuance
of patents;

. our ability to receive royalties for use of our patents
by third parties may be limited; and

. a third party may have or obtain one or more patents that cause
specific aspects of our business to be restricted or that
require us to pay license fees.

We cannot predict how United States laws and court decisions may
impact our proprietary rights. Any such impact would need to be assessed
in the context of a particular situation. We are also uncertain whether
countries other than the United States will grant patents for inventions
pertaining to Internet-related businesses, or as to the extent of
protection those foreign patents would afford if issued. As in the United
States, the legal standards applied abroad for intellectual property in
Internet-related businesses are evolving and unproven. Any ruling or
legislation that reduces the validity or enforceability of our patents may
seriously harm our business.

We presently have one lawsuit pending against a company we believe
has infringed on our patents. We believe that we have settled that
lawsuit, and the court in that case issued an initial report and
recommendation concurring with our belief and specifying proposed
settlement terms. That initial report and recommendation has been appealed
by the defendant to the Federal Circuit, and is awaiting disposition. This
litigation has been costly, and, if the above described settlement is not
finalized, the lawsuit may continue over the course of several years. The
outcome of this lawsuit, as well as any other lawsuits we may file, may not
be favorable to us. We may not prevail and prevent others from infringing
on our patents and using our proprietary rights. Furthermore, one company
we sued and an affiliate of that company have filed two separate lawsuits
against us seeking damages or to prevent us from using features of our
system or business. Both companies in the above described lawsuits are
taking steps in the United States Patent and Trademark Office to contest
our patent rights. On May 2, 2000, the United States Patent and Trademark
Office granted the request for re-examination of our Patent. Therefore,
our United States Patent No. 5,761,648, "Interactive Marketing Network and
Process Using Electronic Certificates" (the "'648 Patent") will be re-
examined. The re-examination may result in the '648 Patent being narrowed
in scope or declared invalid.

We expect that, like other participants in our market, we will
increasingly be subject to infringement claims as the number of services
and competitors in our industry segment grows. Any infringement claim,
regardless of its merit, could be time-consuming, result in costly
litigation, cause service modifications or delays or require us to enter
into royalty or licensing agreements. Licenses for third party patents
might not be available on terms that are acceptable to us, or at all.

TRADEMARKS, COPYRIGHTS AND TRADE SECRETS

We rely on a combination of laws and contractual restrictions to
establish and protect our proprietary rights. The contractual arrangements
and other steps we have taken to protect our intellectual property may not
prevent misappropriation of our proprietary rights or deter independent
third-party development or use of similar intellectual property. In
addition, we have registered and have applied for registration of
trademarks and service marks in the United States and in other countries.
However, our pending registrations might not be issued and our registered
marks may not prevent others from using similar marks.

DOMAIN NAMES

We currently hold the Internet domain name coolsavings.com, as well
as various other related names. The requirements for holding domain names
could change. As a result, we may not acquire or maintain the
"coolsavings.com" domain name in the United States or all of the countries
in which we wish to conduct business in the future. This could impair our
efforts to increase brand recognition and to increase traffic to our web
site. We also could be subject to disputes over our ownership of our
domain names, which could be costly and disruptive.

LICENSES

As of April 30, 2003, we have granted licenses to eight competitors
under our patent, several on the condition that they restrict their coupon
distribution in ways acceptable to us. Several of these license agreements
involve the payment to us of royalties or license fees. Total revenues
generated under these licenses for the three months ended March 31, 2003
and 2002 were $75 and $66, respectively. If the nature or scope of the
licenses were disputed, we would need to institute proceedings to enforce
our rights under these agreements or under our patent. In that case, if we
did not institute proceedings to enforce our rights, or if we did not
succeed in such proceedings, then our license revenues could decrease
substantially or entirely.

WE MAY LOSE BUSINESS OR INCUR LIABILITIES TO OUR ADVERTISERS DUE TO
UNCERTAINTIES OR INACCURACIES IN OUR DATABASE INFORMATION

It is important to our advertisers that we accurately record our
members' demographics, and track our delivery of offers and advertisements
and, in some instances, redemptions of incentives that are offered to our
members. If the systems we have developed to record information about our
members' demographic profiles, usage of our web site and other member
information do not perform as intended, we may not be able to accurately
evaluate our members' household characteristics or the success of an
advertiser's promotional campaign. We rely on the accuracy of the
demographic, income and other information provided by our registering
members. If advertisers perceive our tracking and evaluations to be
unreliable or if our members' self-reported information proves to be
inaccurate, we may lose current and potential advertisers, suffer erosion
in our advertising rates or face disputes over proper advertising charges.

FAILURE TO PROMOTE AND PROTECT OUR BRAND WILL HARM OUR BUSINESS

We believe that strengthening our brand will be increasingly
important because our market is competitive and has low barriers to entry.
Our ability to promote and position our brand depends on the success of our
marketing efforts and whether we can provide high quality services that
motivate our members to use our services. If our brand enhancement
strategy is unsuccessful, our business will be harmed.

WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY AGAINST CURRENT AND FUTURE
COMPETITORS

The market for e-marketing services is new, rapidly evolving and
intensely competitive. Barriers to entry for companies in our market are
low, and current and potential competitors can launch new web sites and e-
marketing services at relatively low cost.

Many of our current and potential competitors have longer operating
histories, greater brand recognition, larger customer or user bases, and
significantly greater financial, marketing, technical and other resources
than we do. In addition, our competitors may be acquired by, receive
investments from or enter into other commercial relationships with larger,
well-established and well-financed companies. Therefore, some of our
competitors may be able to devote greater resources to marketing and
promotional campaigns, adopt more aggressive pricing policies and devote
substantially more resources to web site and systems development. They may

also try to attract advertisers by offering free services. Increased
competition may cause us to lose brand recognition and market share and
could otherwise harm our business.

OUR FAILURE TO ATTRACT, ASSIMILATE AND RETAIN HIGHLY SKILLED
PERSONNEL MAY SERIOUSLY HARM OUR BUSINESS

Our future success depends on the continued services of our senior
management and other key sales and technical personnel, particularly
Matthew Moog, our President and Chief Executive Officer, David Arney, our
Chief Financial Officer, John J. Adams, our Chief Operating Officer, Ken
Treske, our Chief Marketing Officer, Charlie Kingery, our Senior Vice
President of Sales, and David Desser, our Vice President of Business
Affairs and General Counsel.

Our future success also depends on our ability to identify, attract,
retain and motivate highly skilled employees. Competition for the best
employees in our industry remains intense. We have occasionally
encountered and may continue to encounter difficulties in hiring and
retaining highly skilled employees, particularly qualified software
developers for our web site and database systems. We may be unable to
retain our key employees or identify, attract, assimilate or retain other
highly qualified employees in the future.

OUR REPUTATION AND BUSINESS COULD BE DAMAGED IF WE ENCOUNTER SYSTEM
INTERRUPTIONS OR CAPACITY LIMITATIONS

We seek to generate a high volume of traffic and transactions on our
web site. Our database must also handle a large volume of member data and
information about members' usage of our web site. The satisfactory
performance, reliability and availability of our web site, database systems
and network infrastructure are critical to our reputation and our ability
to attract and retain large numbers of members. Our revenues depend on
promotional offers being readily available for members and our ability to
process their coupon downloads, e-mail responses or other transactions on
our web site. Any system interruptions that result in the unavailability
of our service or reduced member activity would impair the effectiveness of
our service to advertisers. Interruptions of service may also inhibit our
ability to attract and retain members, which in turn will hinder our sales
and marketing efforts. We have experienced periodic system interruptions,
which may occur from time to time in the future.

Additionally, acts of sabotage, known as denial of service attacks,
on prominent, high traffic web sites have caused extended interruptions of
service on those web sites. Like other operators of web sites, we could
also face system interruptions or shutdowns as a result of a denial of
service attack.

A substantial increase in rate of traffic on our web site will
require us to expand and upgrade our technology, processing systems and
network infrastructure. Any unexpected upgrades could be disruptive and
costly. In addition, our existing systems may encounter unexpected problems
as our member base expands. Our failure to handle the growth of our
databases could lead to system failures, inadequate response times or
corruption of our data. We may be unable to expand and upgrade our systems
and infrastructure to accommodate this growth in a timely manner. Any
failure to expand or upgrade our systems could damage our reputation and
our business.

Furthermore, the increased use of the Internet has caused frequent
interruptions and delays in accessing and transmitting data over the
Internet. If the use of the Internet continues to grow rapidly, the
Internet's infrastructure may not continue to support the demands placed on
it, and its performance and reliability may decline. Interruptions or
delays in Internet transmissions may disrupt our members' ability to access
advertisers' offers on our web site and our ability to send targeted e-
mails. We also rely on web browser technology to create and target
promotional offers. If access to these web-based systems is interrupted,
our ability to disseminate new offers will be impaired, which could cause
lost revenues or disputes with our advertisers.

WE RELY ON THIRD PARTY SERVICE AND EQUIPMENT PROVIDERS, AND ANY
DISRUPTION OR FAILURE IN THE SERVICES OR THE COMPUTER HARDWARE THEY PROVIDE
WILL HARM OUR BUSINESS

We rely on a third-party service provider to provide access to our
web site and support its operation. Our web site infrastructure is co-
located at the suburban Chicago facility of Exodus Communications, Inc.
which filed for protection under Chapter 11 of the U.S. Bankruptcy Code in
2001 and was acquired by Cable and Wireless PLC in February 2002. Our
support arrangement with this provider is for a term of one year and may be
canceled on 30 days notice in certain circumstances. In the event this
arrangement is terminated, we may not be able to find alternative service
providers on a timely basis, on terms acceptable to us or at all. In
addition, we rely on software licenses from third parties. If these
licenses are terminated or if such software is no longer supported by its
manufacturer, we may not be able to find and install satisfactory alternate
software on a timely basis, on terms acceptable to us or at all.

Our success and our ability to attract new members and motivate our
members to respond to our advertisers' offers depends on the efficient and
uninterrupted operation of our computer and communications hardware
systems. Our web servers and the database behind our system, as well as the
servers we use to perform data analysis, are currently located at Exodus, a
Cable and Wireless Service data center in Oak Brook, Illinois. Currently,
all site traffic is directed to the Exodus system and we maintain a
redundant version of our entire system at our Chicago headquarters. The
computer systems at each of our two hosting sites are vulnerable to damage
or interruption from floods, fires, power loss, telecommunication failures,
and other natural disasters. In addition, the backup system in our Chicago
facility has only two hours of emergency back-up power. The occurrence of a
natural disaster or other unanticipated problems at our facility or at the
Exodus facility could result in interruptions in or degradation of our
services. Our business interruption insurance may not adequately compensate
us for resulting losses.

Furthermore, the computer servers running our system are vulnerable
to general mechanical breakdown or component failure, computer viruses,
physical or electronic break-ins, sabotage, vandalism and similar
disruptions, which could lead to loss or corruption of data or prevent us
from posting offers on our web site, sending e-mail notifications of new
offers or delivering coupons or other certificates to our members.

WE DEPEND ON INTERNET SERVICE PROVIDERS TO DELIVER OUR E-MAIL
TRANSMISSIONS

We send e-mail messages on behalf of advertisers to our members who
have requested to receive e-mail from us; we also assemble and transmit e-
mail newsletters to our members which contain promotions from multiple
advertisers. In order for our members to receive our e-mails, we depend on
Internet Service Providers (ISPs) to accept and deliver those messages to
our members.

Due to the proliferation of unsolicited e-mail, many ISPs are
developing technologies to limit or eliminate the delivery of unsolicited
e-mail to their members. Although we send e-mail only to those members who
specifically have requested we do so, the technologies being developed or
currently in use may not respect the choice made by our members. We, along
with others in the industry that send e-mail, have at various times and
during the first quarter of 2003 experienced the failure of an ISP to
deliver e-mails to their customers who also are our members.

Many of our members use an e-mail service provided by one of the
relatively small number of large ISPs. If one or more of those ISPs fails
to deliver our e-mail transmissions, our inability to communicate with
those members could harm our business. In such a circumstance, we may not
be able to send the volume of e-mail requested by an advertiser.
Additionally, our inability to communicate with those members may cause
them to stop visiting our web site. If our database of e-mail addresses
shrinks materially as a result of the failure of one or more ISPs to
deliver our e-mail, advertisers may be less willing to purchase our e-mail
products and services.

WE MAY BE SUBJECT TO CLAIMS OR REGULATORY INVESTIGATIONS AS A RESULT
OF OUR DATA ANALYSIS ACTIVITIES

The information in our database is an integral part of our business.
We do not sell member identifying information to third parties without the
consent of the member. Furthermore, we send our e-mail notices and
newsletters to members who have elected to receive them. Some people who
receive promotions from us may be unhappy that we contacted them. In
addition, we provide advertisers with aggregate information regarding
member demographics, shopping preferences and past behavior. Our use of
this aggregated information may cause dissatisfaction among our members or
otherwise lead to negative publicity. There has been substantial publicity,
governmental investigations and litigation regarding privacy issues
involving the Internet and Internet-based advertising. To the extent that
our data mining and/or other activities conflict with any privacy
protection initiatives or if any private or personally identifiable
information is inadvertently made public, we may become a defendant in
lawsuits or the subject of regulatory investigations relating to our
practices in the collection, maintenance and use of information about, and
our disclosure of these information practices to, our members. Litigation
and regulatory inquiries of these types are often expensive and time
consuming, and their outcome is uncertain. We may need to spend significant
amounts on our legal defense, and senior management may be required to
divert its attention from other aspects of our business. Furthermore, a
judgment or decree may be entered against us which could require us to pay
damages or to make changes to our present and planned products or services.

OUR BUSINESS WILL BE HARMED IF OUR ONLINE SECURITY MEASURES FAIL

Because our efforts to attract and retain members depend, in part, on
potential members' expectations of privacy in using our services, our
business could be damaged by any security breach of our database or web
site. We may be required to spend significant capital and other resources
to protect against security breaches or to alleviate problems caused by
these breaches. Someone circumventing our security measures could
misappropriate proprietary information, corrupt our database or otherwise
interrupt our operations. We could also be subject to liability as a result
of any security breach or misappropriation of our members' personal data.
This could include claims for unauthorized purchases with credit card
information, impersonation or other similar fraud claims, as well as claims
based upon other misuses of personal information, such as unauthorized
marketing. These claims could result in costly litigation and could limit
our ability to attract and retain advertisers and members. Our security
measures may fail to prevent security breaches. Any failure to prevent
security breaches will damage our reputation and harm our business.

WE MAY BE LIABLE FOR SUPPLYING INACCURATE PROMOTIONAL INFORMATION TO
CONSUMERS

Our employees may make errors in posting our advertisers' promotions.
We may face liability if the promotional information in the offers
available to our members is inaccurate. Additionally, any negative
publicity generated as a result of inaccurate information in the offers we
deliver could damage our reputation and diminish the value of our brand
name.

WE MAY BE HARMED IF OUR ADVERTISERS FAIL TO HONOR THEIR PROMOTIONS ON
OUR WEB SITE OR TO COMPLY WITH APPLICABLE LAWS

Our success depends largely upon retailers honoring our electronic
and printed coupons and upon advertisers reliably delivering and accurately
representing the listed goods and services. We have occasionally received,
and expect to continue to receive, complaints from our members about
retailers' failure to honor our coupons or about the quality of the goods
and services featured in our promotions. These complaints may be
accompanied by requests for reimbursement or threats of legal action
against us. Any resulting reimbursements or related litigation could be
costly for us, divert management attention, or increase our costs of doing
business. In addition, our advertisers' promotion of their goods and
services may not comply with federal, state and local laws. Our role in
facilitating advertisers' sales activities may expose us to liability under
these laws. If we are exposed to this kind of liability, we could be
required to pay substantial fines or penalties, redesign our web site or
business processes, discontinue some of our services or otherwise spend
resources to limit our liability.

WE DEPEND ON WIDESPREAD ACCEPTANCE OF ONLINE DIRECT MARKETING AND
PROMOTIONS AND THE CONTINUED GROWTH OF ONLINE COMMERCE

Our success depends on the continued growth and acceptance by both
consumers and advertisers of online direct marketing and other promotional
services available through the Internet. Although incentive promotions and
direct marketing have been provided for many years through newspaper
inserts, direct mailing and other conventional marketing and sales
channels, they have only recently been offered on the Internet. Many of our
current or potential advertising customers, particularly traditional
offline businesses, have little or no experience using the Internet for
advertising purposes, and may be reluctant to spend money on our services.
As a result, we face a longer sales cycle when dealing with traditional
offline businesses. At times, these sales cycles can last more than a year.
In addition, some traditional retailers may not readily accept our
computer-generated certificates as valid, in part because of their
cashiers' lack of familiarity with them and the risk that these coupons can
be counterfeited. The other services we offer, including the use of
targeted e-mails to alert consumers to savings opportunities, also
represent new marketing methods whose acceptance by consumers and
advertisers is less certain than traditional marketing methods. Although we
do not send unsolicited e-mail, commonly known as "spam," negative public
perception associated with "spam" could reduce the demand for our services.

In addition, we are dependent upon the continued growth of the
Internet as a medium for commerce. Demand for services and products sold
over the Internet is uncertain for a number of reasons, including concerns
related to network reliability and poor performance. Furthermore, concerns
about the security of transactions conducted on the Internet and consumer
privacy may inhibit the growth of the Internet generally, and online
commerce in particular. Any compromise of security involving Internet-based
transactions could result in negative publicity and deter people from using
the Internet or from using it to conduct transactions that involve
transmitting confidential information, such as registering for membership
or purchasing goods and services. Changes in or insufficient availability
of telecommunications services to support the Internet also could result in
slower response times and reduced usage of the Internet. If use of the
Internet does not continue to grow, grows more slowly than expected or does
not become a viable commercial marketplace, our business will suffer.

CHANGES IN CONSUMER AND ADVERTISER TRENDS COULD HARM OUR BUSINESS

We derive substantially all of our revenues from fees charged to
advertisers for our promotional services. Therefore, we will be affected by
changing trends in retail advertising, such as the trend away from periodic
promotions and toward "everyday low prices." In addition, many of our
advertisers are national retailers and suppliers of consumer products and
services. These businesses are affected by the general economy as well as
consumer confidence, which has at times diminished despite otherwise strong
financial conditions. Consumer spending also can be affected by trends
related to lifestyle, such as changing tastes in fashion or entertainment.

WE MAY NOT BE ABLE TO KEEP UP WITH RAPID TECHNOLOGICAL DEVELOPMENTS
AND EVOLVING INDUSTRY STANDARDS

The Internet is characterized by rapidly changing technology,
evolving industry standards, frequent new service and product
announcements, introductions and enhancements, and changing consumer and
advertiser demands. Our future success will depend on our ability to adapt
our services to rapidly changing technologies and evolving industry
standards and to continually improve the performance, features and
reliability of our services. For example, we may be required to adapt our
services to be compatible with Internet-connected devices other than
traditional personal computers, such as handheld and wireless devices. We
may also need to adapt to evolving standards resulting from the convergence
of the Internet, television and other media. The widespread adoption of new
Internet, networking or telecommunications technologies or other
technological changes could require us to incur substantial expenditures to
modify or adapt our services or infrastructure.

FEDERAL, STATE AND LOCAL GOVERNMENTS MAY FURTHER REGULATE THE
INTERNET, INTERNET ADVERTISING AND PRIVACY WHICH COULD SUBSTANTIALLY HARM
OUR BUSINESS

The adoption or modification of laws or regulations relating to the
Internet, Internet-based advertising and privacy, and the application of
traditional legal principles to on-line activities, could harm our
business. In particular, our business could be severely damaged by any
regulatory restrictions on our collection or use of information about our
members.

Laws and regulations that apply to Internet advertising and
communications and Internet users' privacy are becoming more prevalent. For
example, the United States Congress and Federal Trade Commission have
adopted laws and regulations regarding the online collection and use of
information from children and the content of Internet communications, and
various states regulate e-mail marketing and online privacy. However, even
in areas where there has been some legislative action, the laws governing
the Internet remain largely unsettled. There is no single government body
overseeing our industry, and some existing state laws have different and
sometimes inconsistent application to our business. It may take years to
determine whether and how existing laws, such as those governing
intellectual property, privacy, libel, taxation, determination of proper
state jurisdiction taxation and the need to qualify to do business in a
particular state, apply to the Internet, Internet advertising and online
activities in general. Also, we have conducted trivia quizzes and other
contests and sweepstakes on our web site, which may be subject to gaming
and sweepstakes laws. Our attempts to comply with these laws may be
inadequate, in part because the effect of these laws on our activities is
often unclear. In addition, since our web site can be accessed from
foreign counties, our business may be subject to foreign laws and
regulations. Activities that may be acceptable in the United States may
not be acceptable in foreign jurisdictions.

We expect that regulation of the Internet and Internet advertising
will intensify. New laws could slow the growth in Internet use and
otherwise adversely affect the Internet as a commercial medium, which would
harm our business. For example, a number of proposals to restrict the
collection of information about Internet users and to tax Internet-based
transactions are under consideration by federal, state, local and foreign
governmental organizations. A three-year federal moratorium on new taxes on
Internet access expired in October 2001, and was extended in November 2001
for two years. This moratorium does not preempt state tax laws; there is no
federal law preempting the levy of state sales taxes to online e-commerce
activities. The taxation of online transactions or other new regulations
could increase our costs of doing business or otherwise harm us by making
the Internet less attractive for consumers and businesses. The application
of existing laws such as those governing intellectual property and privacy
to the Internet and Internet advertising lends additional uncertainty to
our business.

Any application of existing laws and regulations to the Internet; new
legislation or regulation that imposes stricter restrictions on privacy,
consumer protection or advertising practices; any government investigation
of our privacy practices or other business methods; or the application of
laws from jurisdictions whose laws do not currently apply to us could:

. create uncertainty in the marketplace that could reduce demand
for our services;

. limit our ability to collect and to use data from our members,
which could prevent us from attracting and retaining
advertisers;

. result in expensive litigation, costly and disruptive efforts
to respond to governmental investigations and burdensome fines
or penalties;

. increase the cost of delivering our services to advertisers;

. reduce the effectiveness of our targeted promotional
services; or

. in some other manner harm our business.

OUR SERIES B PREFERRED STOCKHOLDER HAS THE ABILITY TO EXERCISE
SIGNIFICANT CONTROL OVER US WHICH MAY DETER THIRD PARTIES FROM ACQUIRING US

The holder of our Series B Preferred Stock has the ability to control
all matters requiring approval by our stockholders, including the election
and removal of directors and the approval of any merger, consolidation or
sale of all or substantially all of our assets. In addition, pursuant to
the terms of our Certificate of Incorporation, the Series B Preferred
stockholder is entitled to designate not less than a majority of the Board
of Directors of the Company. Among other limitations, without the approval
of the holders of at least a majority of the outstanding shares of Series B
Preferred Stock, we may not:

. amend our charter document or our bylaws;

. merge or consolidate with any other company or sell all or
substantially all of our assets;

. make acquisitions of other businesses or assets or enter into
joint ventures or partnerships with other entities that would
involve the payment of consideration of $1 million or more;

. purchase, redeem or otherwise acquire for value any shares of
our capital stock (with certain exceptions); or

. authorize or issue equity securities or securities exercisable
for or convertible into equity securities other than for cash
and shares issuable upon conversion and exercise of securities
outstanding on the date of issuance of the Series B Preferred
Stock and shares issuable under our 2001 Stock Option Plan.

These restrictions provide the holder of the Series B Preferred Stock
with significant control over us and may discourage others from initiating
potential merger or other change of control transactions. In addition, if
the holder of the Series B Preferred Stock were to convert a portion of the
Series B Preferred Stock and sell the common stock issued on conversion,
the price of our common stock could decrease substantially.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to financial market risks associated with fluctuations
in interest rates. Because all of the amounts in our portfolio have
expected maturities of three months or less, we believe that the fair value
of our investment portfolio or related income would not be impacted
materially by increases or decreases in interest rates. If market rates
were to increase immediately by 10% from levels on March 31, 2003, the fair
value of this investment portfolio would increase by an immaterial amount.
If market rates were to decrease immediately by 10% from levels on
March 31, 2003, the resultant decrease in interest earnings of our
investment portfolio would not have a material impact on our earnings as a
whole.

ITEM 4. CONTROLS AND PROCEDURES

(a) We maintain controls and procedures designed to ensure that
information required to be disclosed in the reports that we issue or submit
under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the rules and
forms of the Securities and Exchange Commission. Based upon our evaluation
of our disclosure controls and procedures performed within 90 days of the
filing date of this report, our chief executive officer and chief financial
officer have concluded that our disclosure controls and procedures are
adequate.

(b) We have made no significant changes in internal controls or in
other factors that could significantly affect those controls subsequent to
the date of our evaluation of those controls by our chief executive officer
and chief financial officer.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are currently a defendant in two patent infringement lawsuits and
a plaintiff in another patent infringement lawsuit. For a further
discussion of legal proceedings, see Part 1, Item 3 of our Annual Report on
Form 10-K for the year ended December 31, 2002 filed with the SEC, and the
update below.

On February 12, 2000, Supermarkets Online, an affiliate of Catalina
Marketing, filed a lawsuit against us in the United States District Court
for the Central District of California. The complaint alleges that our
systems and methods infringe its United States Patent No. 6,014,634, and
seeks unspecified damages and injunctive relief. On March 13, 2003, the
Court removed the case from its active caseload until further application
by the parties or Order of the Court. We have filed with the Patent and
Trademark Office a request for a re-examination of the '634 patent, which
request for re-examination was granted in March 2001. An unfavorable
outcome for us is considered neither probable nor remote by management at
this time, and an estimate of possible loss or range of possible losses
cannot be made.

We also are involved in a number of legal proceedings arising in the
ordinary course of business, none of which is expected to have a material
adverse effect on our financial position or results of operations.

We may be involved in additional litigation, investigations or other
proceedings in the future. Any litigation, investigation or proceeding,
with or without merit, could be costly and time-consuming and could divert
our management's attention and resources, which in turn could harm our
business and financial results.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

As of March 31, 2003, a dividend in the amount of 3,008,453 shares of
Series B Preferred Stock has accrued, but had not been declared to the
holders of our Series B Preferred Stock.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

At March 31, 2003, we were not in compliance with certain financial
covenants of the Senior Secured Loan. Defaults under the Senior Secured
Loan and the Amended and Restated Loan Agreement which cannot be cured, as
the Senior Secured Loan and Grid Note have cross-default provisions and are
cross-collateralized include:

.. Our failure to achieve a prescribed amount of billings
during 2002; and

.. Our failure to maintain a minimum level of working capital
and a ratio of cash, cash equivalents and certain receivables over
current liabilities; and

.. Our failure to maintain a minimum ratio of total
indebtedness over tangible net worth.

Consequently, the Senior Secured Loan and all accrued interest
thereon are immediately due and payable at the option of Landmark.
Accordingly, we have classified the Senior Secured Loan, including
principal and the paid-in-kind interest which has been compounded and
accrued on the principal balance totaling $5,781, as currently payable as
of March 31, 2003.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits:

Exhibit 99.1 Certification of Chief Executive Officer
Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.

Exhibit 99.2 Certification of Chief Financial Officer
Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.

(b) Reports on Form 8-K:

The Company did not file any current reports on form 8-K during
the first quarter ended March 31, 2003.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunder duly authorized.

COOLSAVINGS, INC.

Dated: May 14, 2003 /s/ Matthew Moog
----------------------------
Matthew Moog
Chief Executive Officer and
President
(Duly Authorized Officer)

Dated: May 14, 2003 /s/ David B. Arney
----------------------------
David B. Arney
Chief Financial Officer
(Principal Financial Officer)

CERTIFICATIONS
--------------

I, Matthew Moog, certify that:

1. I have reviewed this quarterly report on Form 10-Q of CoolSavings,
Inc.;

2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:

a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;

b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and

c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;

5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons performing
the equivalent function):

a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and

b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and

6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.

Date: May 14, 2003 /s/ Matthew Moog
-----------------------------------
Matthew Moog
President & Chief Executive Officer

I, David B. Arney, certify that:

1. I have reviewed this quarterly report on Form 10-Q of CoolSavings,
Inc.;

2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:

a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;

b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and

c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;

5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):

a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and

b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and

6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.

Date: May 14, 2003 /s/ David B. Arney
-----------------------------------
David B. Arney
Chief Financial Officer